Air Canada reported a $1-billion loss for the year ended December 31, 2008. After financial restructuring in 2009, Air Canada continued to report losses, and it reported a $250-million loss for the year ended December 31, 2011. In June 2012, Air Canada was preparing to ask the Canadian government to allow it to make reduced cash contributions to one of the company's pension plans as well as to reduce other financial pressures. Arbitrator Michel Picher stated, "It is of critical interest for the company to gain that relief now, thereby assuring its long-term solvency." Solvency refers to the company's ability to repay its long-term debt and survive over a long period of time.
Instructions
(a) Air Canada's December 31, 2011, financial statements were prepared using the cost model. What assumption did Air Canada make about its operations?
(b) With the uncertainty facing Air Canada, should the company's financial statements be prepared under the assumption that it will continue to operate for the foreseeable future? Explain.
Taking It Further
Explain the implications of the full disclosure concept for Air Canada's financial statements in these circumstances.